Usha Martin can be a good long-term bet

Kolkata-based Usha Martin is a leading producer of specialty steel and is one of the largest wire rope manufacturers globally. The company's stock has outperformed over the past one year with 50% return compared to 14% of the Sensex. The company's massive capital expenditure in the past three years along with steps taken for backward integration will boost its performance going forward.

BUSINESS: Usha Martin is engaged in manufacturing of special steels used in niche products with customised applications. The company has specialty steel making facility in Jamshedpur and Agra which produces pig iron, direct reduced iron (DRI), billets, wire rods and rolled products for various dimensions and grade. The company has iron ore mine and thermal coal mines in Barajamda and Daltonganj, respectively.

These mines integrate the company's backward reducing its dependence on external sources. However, the company imports coke and coking coal to meet its requirements. The company, through its subsidiary Usha Martin UK and Usha Martin Siam, enjoys a significant international presence, with bulk of its exports to Middle East and Asean countries.

GROWTH: Over the past three years, the company has managed to increase both its steel making and metallic capacity. Its massive Rs2,100 crore capex ends this year, which can incerease, its crude steel and metallic capacity three folds. It is taking steps to reduce its dependence on external sources for raw materials.

The company commissioned a 0.2 million tonne per annum (mtpa) DRI plant in December 2009 and has been running it at more than 90% utilisation levels since then. Adding to this the company was able to source its full iron ore requirement in FY10 and thermal coal requirement for the DRI over the past one quarter from its own mines in Jharkhand. These overall integration steps can have significant positive impact on the coming quarter earnings.

FINANCIALS: Usha Martin's standalone net profit for the quarter ended June 2010 surged 127% compared to the corresponding quarter last year. The company, however, reported lower profit growth on consolidated basis due to subdued performance of its subsidiaries. The company's backward integration initiatives have started paying benefits as its operating margin increased by 360 basis points (bps) in the quarter. Going ahead, integration initiatives taken by the company in both metallic and raw materials segment can help it boost operating margin by more than 300 bps in FY11. The company repaid around Rs675 crore of debt last year, which helped it improve its debt-to-equity ratio to .96 from 1.35 in year FY09.

VALUATIONS: At the current market price of Rs82, the scrip is trading at 22.5 times its trailing 12-month earnings per share. The scrip seems to be trading at a premium compared to its peers such as Surya Roshni and Bhusan steel. However, with its capex cycle almost over and high sales growth seen in the coming quarter, the company can be a good long-term bet.